21 May 2014 #Commercial Real Estate
Break clauses have been making the legal news for several years. Many modern leases contain rights for the tenant to break the lease early, reflecting the increasing requirement of tenants for flexibility. However many older break clauses are drafted very restrictively, making them difficult to operate. A break clause will normally require payment of rent up to the break date, but may also require compliance with other covenants in the lease. This has led to many cases where the landlord and the tenant have ended up arguing about whether the break clause has been effectively operated. Of course in such circumstances the value of the break clause may be very substantial and make it worthwhile for the parties to engage in legal action to resolve the position.
A more recent development has been the payment of rent covering the period beyond the break date and whether this is repayable by the landlord. Even the most straightforward break clauses normally require payment of rent up to the break date. This means that, unless the lease clearly states otherwise (which it rarely does), the tenant is required to pay the full quarter’s rent falling due prior to the break date, even if the break date then falls shortly after the quarter’s rent has become due. This creates a windfall for the landlord who is receiving rent for a period after they have recovered possession.
While cases involving the exercise of break clauses have been reported quite regularly, there has been little authority in relation to the repayment of rent, principally because it is rarely worthwhile for the parties to engage in litigation over this. However one case has now been taken all the way to the Court of Appeal, who handed down Judgment on 14 May 2014. In that case, Marks & Spencer PLC –v- BNP Paribas Securities Services Trust Company (Jersey) Limited, Marks & Spencer was the tenant and BNP the landlord. The premises were situated in Paddington. M&S had a lease expiring on 2 February 2018. It contained a right to break the lease on 24 January 2012 on 6 months’ notice. The important conditions attaching to the exercise of the break were that (a) M&S was required to pay a premium equivalent to one year’s rent and (b) all rent was to be paid up to the break date.
Marks & Spencer exercised the break and then asked BNP to repay the December quarter’s rent which related to the period from 25 January onwards.
There were no express clauses in the lease obliging the landlord to repay Marks & Spencer, but the High Court decided that, on the facts of the case, there was an implied term that this rent would be repayable. The court was heavily influenced by the existence of the requirement to pay one year’s rent by way of premium for exercising the break clause. The court said that this showed that the parties had already decided how the landlord was to be compensated for the early termination of the lease.
The case has now been heard by the Court of Appeal and they have overturned the decision of the High Court. Lady Justice Arden reiterated the long-established case law on implying terms into commercial contracts: the parties must have intended a term to form part of the contract and implying it must be necessary to give business efficacy to the contract. On the facts of this case Lady Justice Arden took the view that no such intention was evident from the lease, nor was such a term necessary for giving business efficacy to the lease. Accordingly the landlord was entitled to retain any payment made prior to the break date relating to the rental period afterwards.
It is difficult for tenants to do much about this if their break clause has already been negotiated and agreed. However drafting break clauses to require repayment under these circumstances is straightforward and as Tenant, now that the legal position is clear, it is worth seeking to include it if at all possible. Whether tenants will be successful in doing so will, of course, depend very much upon the parties’ negotiating positions.